Are We Missing the Message in Economics?
In a world of sound bites and tweets, we’re overlooking the trade-offs inherent in economic analysis
Economists have come under fire of late for a laundry list of transgressions. They are said to have misread economic downturns with outdated frameworks and to be out of touch on big challenges such as climate change. Should economics be renamed Wreckonomics or are the criticisms unfair? This is the first in a series of essays in which economists at Queen’s University weigh in.
There are a great many limitations, caveats and controversies in the study and application of economics. In a broad sense, however, the main problems lie not in mainstream economic theory or empirical analysis but in how insights are communicated and debated in the policy arena. While it is certainly helpful to use plain language when engaging the public, the imperative to win votes inevitably results in oversimplification.
Here are some examples:
“According to economic theory, globalization benefits everyone.”
Nope. Mainstream economic analysis predicts losers as well as winners. As international trade expands, those earning income primarily from inputs used intensively in relatively productive sectors will benefit, while those who are not will lose. While the total benefit should outweigh the total cost, in the real world, income is not typically redistributed so that everyone benefits.
This more nuanced prediction is broadly consistent with what happened in the wake of globalization between 1985 and 2010. The big story was the growth of trade between China and America. In the U.S., highly educated workers, especially in exported financial services, benefitted. Less educated workers in less competitive manufacturing lost out. Low-skilled workers in China gradually shifted into manufacturing, pulling a large fraction of the world’s population out of poverty.
Admittedly, this description is still oversimplified, but you get my point.
“Macroeconomic business cycle analysis has lost its capability to predict downturns.”
It never promised to predict downturns. The entire premise of modern macroeconomic theory is that business cycle fluctuations are largely unpredictable. The goal of the analysis is to design appropriate monetary and fiscal policy responses to these “shocks”, whatever they are and whenever they occur.
While some do try to read the “tea leaves” of yield curves and the like, the joke that “economists predicted nine out of the last five recessions” is hardly a new one.
“Increased GDP is always an indicator of improved economic health.”
Gross Domestic Product is an attempt to measure the contribution of current economic activity to the average wealth of a country’s citizens. It has always been known to have severe limitations, mostly due to difficulties in correctly estimating its various components. This is especially true of items that are not traded in open markets or items for which prices are not a good measure of value.
While incremental improvements in measurement are made over time, progress is slow. An important example is that of non-renewable natural resources that are depleted in production. Although such depletion is already partially accounted for in GDP estimates, this is far from sufficient due to negative externalities. While economists have proposed green national accounting methods for some time, these are only gradually being adopted due to several controversies related to measurement.
As these examples illustrate, a key area in which economists should “up their game” is the clear communication of the many nuances of standard economic analysis. Unfortunately, this means swimming against the tide in a world where most debate consists of sound bites and tweets. Nevertheless, it is a goal worth pursuing if we want to provide reasonable, balanced policy advice.
Huw Lloyd-Ellis is a professor in the Queen’s Economics Department.